United's Biggest Hub Faces Attack by Southwest
In the 1990s, Southwest attacked hub carriers with lower costs, enabling it to undercut their fares. By the 2000s, Southwest's labor cost advantage was diminishing, but it could undercut competitors' fares due to lower fuel costs, a result of its prescient fuel hedging strategy. Now, nearly all carriers hedge fuel.
In Houston, Southwest is at it again, riling the hub carrier with its emerging effort to fly internationally, and seeking to employ its historic model of utilizing a smaller airport that exists in the shadow of a big hub airport, in this case Bush Intercontinental.
But in Houston, Southwest has encountered unprecedented resistance. Not only is hub carrier United Continental Holdings (UAL) fighting back, but also, after decades of having municipalities beg for its service, Southwest is hearing something quite different.
"Council rips study painting Hobby expansion as boon," was the headline in Tuesday's Houston Chronicle . The newspaper covered a Monday meeting at which the city council challenged a consultant's study extolling the benefits to Houston if Hobby Airport expands so that Southwest can fly to Mexican and Caribbean destinations.
The study contends that expansion could lead to 10,000 new jobs and add $1.6 billion to the economy. Southwest wants city permission to build five gates and a $100 million customs facility at Hobby, using passenger fee revenue.
Council members blasted the study, calling it "biased" and "custom-made just to satisfy the demand of Southwest," according to the Chronicle. Members grilled Houston's airport director, a backer of the study, for three hours.
"United had, perhaps, its finest day in the war over Houston's skies as council members expressed skepticism and sometimes hostility toward (the) study," the newspaper wrote.
Asked if Southwest took a hit at the meeting, spokesman Paul Flanagan responded: "It wasn't Southwest who took the hit, but the Houston Airport system." Southwest and United will both present their cases to the council on May 8, he noted.
"Houston is a market that is underserved and overpriced," Flanagan said. "We feel strongly that if given the opportunity to grow our operation in Houston, we would lower fares and stimulate international air travel across the board."
Bob McAdoo, airline analyst for Los Angeles-based Imperial Capital, said it is unlikely that Southwest's projected international operation in Houston would have a major impact on United, but it is understandable that United would be opposed.
"In terms of impacting United shares, it won't," McAdoo said. "It's such a small piece of the pie, strung out over many years because it will take Southwest a long while to build service. From a shareholder point of view, it's so far down the road that I'm not worried about it yet."